Investors Get a ‘Perpetual’ Headache

By Isabella Steger and Fiona Law

Asia’s booming bond market may have reached the limits of what investors will buy, as some of the riskiest debt struggles to sell.

Issuance of so-called perpetual bonds, which pay a high coupon but have no maturity date, hit a record in Asia last year, but as the type of borrowers extends to weaker-quality firms, potential buyers have begun pushing back on such debt.

Chinese property developer KWG Property Holding Ltd., which is rated below investment grade, pulled a perpetual bond sale last week, just days after similar bonds fell on their debuts.

Perpetual bonds are favored by individual investors, some of whom are thirsty for yields and focus on short-term investments. Managers of large bond funds usually shun the instruments because perpetual bondholders rank low in a company’s capital structure and would be the last to recover their capital if the issuer defaults.

Typically, a perpetual bond buyer receives a fixed rate of return, and expects the issuer to redeem the bond after several years. If the bond isn’t redeemed by then, an investor usually receives a higher rate of return, or a “step up,” which gives the issuer an incentive to redeem the bond.

A handful of blue-chip names sold perpetual bonds in either local currency or U.S. dollar markets last year. Hong Kong tycoon Li Ka-shing’s property flagship Cheung Kong (Holdings) Ltd. sold $1 billion of such securities in July, after another one of his conglomerates Hutchison Whampoa Ltd., raised $1 billion that way in May. Hong Kong-based sourcing firm Li & Fung Ltd. also tapped markets for $500 million last year. All three bonds included “step-up” clauses.

Encouraged by a more bullish capital market, some riskier companies, such as Chinese property developers, are pushing to issue these bonds. But while investors have been willing in the past to buy those with set maturities, they have been less willing to take on the added risk of a perpetual bond.

Last week, in a first for Asia, Cheung Kong, which is unrated but whose subsidiaries are all investment grade, sold $500 million worth of perpetuals in the dollar market that didn’t include a “step-up” clause.

But these fell as much as 5% in the secondary market, unlike their perpetual bonds issued last year, which rose.

China’s Agile Property, which has a “junk” rating of double-B from Standard & Poor’s, sold around $700 million worth of perpetual bonds last month, but they fell as much as 4% after they started trading Jan. 14. On Monday, they were still trading below their face value.

In both cases, heavy allocations of bonds to individual investors contributed to the selloff, traders and bankers said, as such buyers typically don’t hold their investments for extended periods and are more prone to panic selling.

Last week, KWG Property, rated double-B-minus by S&P, abandoned a plan to sell a $300 million perpetual bond, people familiar with the situation said. Although the instrument had an initial proposed coupon of 10.25% and would rise 0.25 percentage point from year 10.5 and step up 0.75 percentage point from year 20.5, some investors said the terms weren’t enough to encourage the issuer to redeem the bond.

Investors should focus on the terms of each perpetual bond sale, J.P. Morgan’s Mr. Follett said. “It might be harder for lower-rated companies to tap capital markets again to refinance, and redeem their bonds, at the ‘expected’ redemption date.”

Bryan Collins, fixed-income portfolio manager at Fidelity Worldwide Investment which has $289.4 billion under management, said he tends to avoid perpetual bonds.

“The recent [perpetual bonds’ structures] have been weak and mispriced,” he said, adding there is plenty of new supply of bonds.

That said, poor investor appetite for Agile and KGW’s perpetual bonds doesn’t mean investors have shunned other bonds from these companies. Agile raised $700 million via five-year bonds with a 9.88% coupon, and KGW sold $400 million at 13.25% with the same maturity, both in March, according to data provider FactSet.

Chinese developers continue to lead high-yield bond issuance in Asia this year, helped by improving news about on China’s real-estate sector. Such bond sales are at a record for the first weeks of the year, Dealogic said.

Perpetual bonds, good luck, my parents had some in Bank of Ireland, all worthless now. Perpetual bonds are no bonds, they are high risk and calling them bonds is confusing, and plain wrong. They are worse than owning shares...

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